How an investor ended up with a $260,000 debt when the market fell

He invested with borrowed funds and was forced to sell at a loss when Covid-19 hit

- Tan Ooi Boon

We all hope for a silver lining in our financial dealings but one investor here lost a fortune when his dabbling in that precious metal crashed like a lead balloon.

He also got an unwelcome lesson in the risks of investing with borrowed funds because you can be forced to sell at a loss when the market turns.

And it's not as if he could blame anyone else for his misfortune: This was a seasoned investor well aware of the high risks that margin account trading - borrowing in the hope of making a profit - entails.

The precious metal investor had 88 silver futures contracts under a margin account with his broker in early 2020. Each contract dealt with 5,000 troy ounces of silver, which was worth around $135,000 then.

It is not known how much of his own money had been sunk into his account, but the deal enabled him to borrow more to facilitate his trades.

All was well until global markets started tumbling on March 13, 2020, following the Covid-19 outbreak, resulting in his portfolio value tumbling to below the critical 20 per cent cut-loss mark in just over four days.

The market crash initially left his account in deficit to the tune of about $80,000. A call from his broker led him to sell close to 20 per cent of his portfolio to cover the shortfall.

But this was not enough to stem the tide of red ink, and the following day, he had a "margin call" to top up a shortfall of about $500,000.

He had a breather when trading closed for the weekend, allowing him to transfer money to his account, but it was not done in time.

More bad news awaited when trading resumed on Monday. The market continued to tumble, resulting in him having to cash out his entire investment, yet he still ended up with a debt of $350,000.